Flat rounds creep up

Anxieties that the pandemic would shutter vulnerable startups haven’t quite seemed to materialize at scale: Funding in the third quarter surged to a seven-quarter high. Still, under the covers, the story has not been so simple. Some startups have hit warp-speed, while others are struggling even as they raise new […]

Anxieties that the pandemic would shutter vulnerable startups haven’t quite seemed to materialize at scale: Funding in the third quarter surged to a seven-quarter high.

Still, under the covers, the story has not been so simple. Some startups have hit warp-speed, while others are struggling even as they raise new funding. In the last quarter, law firm Cooley found that funding rounds that resulted in an uptick in valuations fell to their lowest level since the first quarter of 2017, when fears of a tech bubble soared but never quite found a cliff.

In other words: A total of 20% of startups in the third quarter either lowered or kept the same valuation despite raising new funding. The figure has risen steadily since the start of the pandemic, according to Cooley’s findings, which are based on 303 deals representing $13.1 billion in capital. Down rounds represented about 12% of all funding events, while flat rounds ticked up to 8%.

Cooley also noticed an uptick in pay-to-play provision—which requires investors to participate fully in the financing of future rounds or risk losing some of their rights. While the pay-to-play provision itself is not something founders avoid, its implications—that the company may have struggled to find ideal outside investors—are often undesirable.

“It is a bit of a barbell where companies at the very top end are naming their own terms and big, price-insensitive investors are willing to write big checks,” says Peter Werner, Cooley’s co-chair of global emerging companies and venture capital practice group. “And there are companies at the low end and are unable to raise a full healthy up round.”

While the funding atmosphere is significantly better than in ’08, he says, the data could be a mere blip—or become a trend.

VENTURE CAPITAL IN BIDEN’S EAR: President-elect Joe Biden has picked Ron Klain—executive vice president and general counsel at VC firm Revolution—as his White House Chief of Staff. One of Biden’s closest confidants, Klain led the Obama administration’s response to the Ebola crisis in 2014, and has been highly critical of President Donald Trump’s response to the coronavirus. Read more.

Lucinda Shen
Twitter: @shenlucinda
Email: lucinda.shen@fortune.com

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